After one of the steepest and quickest market sell-offs in history, it may seem odd to read that equities are still overvalued. To be clear, most equities are both oversold and at least fairly valued (if not under-valued) after this past week. We mentioned to our readers that we have turned mildly bullish on equities, in general, but remain cautious (we won't employ the term bearish now) on a specific segment of the market. And that segment, U.S. large cap growth, can specifically be narrow down to Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), and Google (GOOG) (GOOGL). We find it rather ironic that the week before last, President Trump proudly held up a sheet of paper saying "The Trillion $ Club" with Microsoft, Apple, Google, and Amazon. The MAGA stocks. Well, the Trillion $ Club just lost two members, Amazon and Google. We have been wondering how long it would take President Trump's boastfulness in regards to the stock market to turn around and bite him in the ass. It just happened.
While we are putting our massive cash reserves to work here, we will not be buying the former MAGA stocks. These stocks are in an unusual situation of being, at the same time, oversold yet still overvalued. First, we can all agree on the oversold aspect. The following table shows the RSI's on the four titans. We consider an RSI 9-day under 20 to be oversold, while an RSI 14-day under 30 is oversold.
RSI 9-day | RSI 14-day | |||
Feb. 21 | Feb. 28 | Feb. 21 | Feb. 28 | |
Apple | 21 | 41 | 29 | 48 |
Microsoft | 32 | 46 | 37 | 54 |
Amazon | 25 | 55 | 35 | 61 |
26 | 47 | 32 | 53 | |
Note that these are the Friday closing RSIs. Prior to the afternoon rally when the Dow was again down -1000 points for the Friday session, all four of these stocks were solidly in oversold territory. These flash oversold conditions leave us a bit unsatisfied that full flush out occurred in these stocks.
Second, despite losses for the week of -9.7% on Google, -10.1% on Amazon, -9.2% on Microsoft, and -12.7% on Apple, we see all four stock as still overvalued, to varying degrees. We can further define "overvalued" as both overvalued on a price basis relative to the market and overvalued on a fundamental valuation basis.
We demonstrated in our recent article, Big 4 Vs. S&P 496 that these four tech stocks were almost single-handedly lifting the major U.S. equity indexes. Our belief expressed in this article was that the Big Four tech index and the S&P 496 will eventually re-converge. We updated the chart featured in this article below. The re-convergence is indeed underway!
We updated our valuation charts for the Big Four tech stocks. We can confirm that the 10% to 12% corrections in these stocks have not sufficiently alleviated over-valuations to entertain the possibility of a long-term investment in these names.
Apple remains expensive from our point of view. We alerted readers last November in our article Apple: Bottom Of 9th Inning that the company was getting too pricey, despite the overwhelmingly positive narrative. When we wrote the article, Apple was trading at $265. While too early, given the $60 further price gains in the blow-off buying phase, our analysis may yet prove accurate. Apple traded down to $256 Friday before bouncing.
Apple's forward consensus P/E came down to 18.9x on Friday. Yet, the ratio remains well above the mean of 16.9x. There is very little value in Apple's stock at this stage.
Apple's price-to-cash flow also remains stubbornly high.
The company's valuation does not attract us either. Both enterprise value-to-sales and enterprise value-to-EBITDA remain in the high end of the historic range for Apple.
In sum, Apple may remain a good trade for a momentum investor (once momentum turns up), but we see little margin of safely for long-term value investors.
Microsoft's stock, like Apple's stock, had entered a euphoric bubble phase. Valuations on Microsoft remain historically very high. The optimistic forward P/E remains at 26.6x, still well above the mean historic P/E of 19.4x.
Microsoft's enterprise value does not inspire us to invest in the stock for more than a short-term momentum trade.
Amazon, despite its 81x PE ratio, is relatively more attractive in our analyst than Microsoft or Apple. On an absolute basis, yes, the P/E seems ridiculous. But given that Amazon has traded historically at P/E's in the triple digits, we see that the earnings term in the denominator has accelerated to bring down Amazon's current P/E. In fact, Amazon has even qualified as a growth stock on the WMA Watch List (which considers a PEG valuation measure). However, we still group Amazon in the overvalued category on a company valuation analysis. Enterprise value-to-EBITDA remains in the high end of the historic range, even if this metric is below 2018 highs.
Finally, Google is another stock that remains overvalued despite losing over -10% of its value last week. On a P/E basis, like Amazon, Google is a lot less stretched than Apple and Microsoft. When looking at company valuation, Google comes closest of the Big Four to being "fairly valued". Enterprise value-to-EBITDA at 16.9x is only slightly above the historic mean of 15.4x. Another leg down in Google's stock price would actually put Google on our radar for an investment (provided growth remains robust).
Conclusion
The Big Four tech stocks hit oversold levels, but remain overvalued. Apple and Microsoft remain extremely expensive while Amazon and Google are now only moderately overvalued. We recommend avoiding these crowded names for now. The implication for investors is that passive index investments in the S&P 500 and Nasdaq are not the best strategy today. We see plenty of great buying opportunities for thoughtful investors who turn away from index funds and return to individual stock selection.
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